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The Energy Revolution is Here – How Will You Adapt?

The centralized, top-down grid and delivery system and stable business model for utilities that has endured for the better part of the last century is being disrupted by a number of drivers, causing adaptation and evolution in how we produce, move, and use energy.

Around the world, microgrids are developing without the need for utility services, and investors seeking clean-energy opportunities, with quicker returns are pouring money into the new alternatives.

Even here in Canada the Independent Electricity System Operator of Ontario recently logged more than 3,800 MW of embedded generation—that’s power being generated close to where it is needed, instead of in centralized plants.

Canada includes 13 different jurisdictions with very different energy portfolios, economic opportunities and climate priorities. Each jurisdiction is moving at a different pace, with different opportunities and challenges.

We know that the redesign of the conventional energy delivery system is not only inevitable but underway as we transition to cleaner energy. While the system will look mostly the same to the average Canadian, the rules and players are starting to change.

What are Some of the Biggest Challenges that the Energy Sector is Facing?

We’ve broken down these challenges into three themes: infrastructure access, grid defection, and investor priorities.

Infrastructure Access

Infrastructure access is being demanded from a variety of non-traditional players, who are beyond the scope of current energy regulation, which is causing increasing system complexity.

Combined Heat and Power is a well known example. As QUEST’s Senior Associate, Richard Laszlo explains in Energy Regulation Quarterly, CHP expands the number and diversity of customers interested in self-generation to include smaller industrial facilities, commercial and institutional buildings, and even large residential developments, an ability once reserved solely for large industrial players. When CHP systems are designed as load displacement generation projects, they are potentially disruptive to the current electric utility business model, and also blur the lines on customer and utility roles, relationships and expectations. Further complicating matters, CHP is unique as a multi-fuel technology with the potential to cross the regulatory divide of electricity and natural gas.

Another example is the growth of independent electrical power services and solutions companies which are making significant inroads into the traditional system. These independent businesses are challenging and innovating traditional energy sector business models by offering electrical power services and solutions to North American industrial, commercial, institutional, renewable, and agricultural customers, as well as utility markets including municipalities, universities, schools, and hospitals.

Grid Defection

While full grid defection may not have significant uptake any time soon, partial grid defection has already started to become common practice as consumers look to take advantage of economic opportunities.

The reason for this is in part cost. Distributed energy resources are becoming more competitive for valuable grid services such as load balancing, peak shaving and improving power quality.  As prices of distributed energy generation and storage continue to decline, the threat of grid defection will increasingly become a reality to utilities.

Without proper adjustment, utilities using a volumetric grid charge may risk a threat of stranded assets as energy consumption declines. Utilities operating in a high distributed energy resource uptake environment will have to adjust their remuneration for partial grid defecting consumers to ensure that they are paying their fair share of the upkeep and operation costs of grid infrastructure.

Investor Priorities

The energy industry is facing a less patient investment sector which is increasingly looking for a quick return. In addition to this, new technologies can be riskier investments which makes accessing capital more challenging.

 We see this happening as interest in Renewable Natural Gas increases. Long term patient capital is needed to install equipment for the costly process of cleaning up raw biogas, but the investment community is looking for a quick return on their investment.  

This is inadvertently creating a barrier to the adoption of a technology which is increasingly being demanded by markets responding to renewable and low carbon content requirements.

These three challenges alone – infrastructure access, grid defection, and investor priorities –  paint a pretty scary picture of the future but there is some good news. New technology brings with it new efficiencies and opportunities. Electric vehicles, for example with their demand side management potential and opportunities for load growth, are offering a ray of sunshine for electric utilities. We also aren’t alone. The energy revolution, isn’t just happening in Canada. While we aren’t likely to get a one size fits all solution – New York, California, the UK, Australia and others are facing the same challenges and are working on solutions.

What is Driving the Energy Evolution?

We’ve broken this question into four themes: consumer choice, data, financial tools, and social drivers.

Consumer Choice

Consumers are taking more control over how they use and produce energy. Think self-generation, microgrids, energy monitoring from your smartphone, smart meters, energy efficiency… The list goes on.

The adoption of smart meters in many jurisdictions has allowed for increased consumer participation by creating value for consumers who engage in peak shaving under variable time of use rates. Smart meters (or duplicate meter installations) have also enabled net-metering for distributed energy services such as rooftop solar PV generation and demand-side response through energy storage.

One way to manage this increased uptake will be through aggregation, which with the spread of wireless communication can make it possible to communicate with and remotely adjust distributed energy resources in real time at virtually zero marginal cost.

As consumers become increasingly engaged in the electricity market, however, there is a need for regulators to ensure consumer protection, especially for those who are considered to be vulnerable populations. The rapidly advancing technology of distributed energy resources requires standardization and some form of regulation.

Data, Data, and More Data

Add to this that technology has also enabled the collection of vast amounts of data. We are now capable of collection more energy and emissions data than ever before. Issues around data ownership, privacy, standardization and who can use it and for what purpose need critical thought, and quickly. Comprehensive data collection is already being deployed in regulatory and policy vacuums. Data, if well mined, can provide valuable insight into how energy is being used. The question is: how do we take advantage of this to ensure that opportunities for efficiency in the system are being realized?

Financial Tools

Technology is also driving change in the financial systems used by utilities. Companies in Canada and around the world are already beginning to experiment with transactive energy as a way to offer utilities the means to profit from running a distribution-level market. In simple terms, distributed energy resources would offer a bid for their energy and services and local supply would match demand to the extent possible. From there, the utility would submit the remainder as a single wholesale-market purchase at the transmission distribution interface.

Equs Ltd. in Alberta, for example,  is providing electrical distribution services to 12,000 members in central and southern Alberta and using blockchain technology to make payouts to renewable energy producers. And Alectra Utilities in Ontario is creating a system where consumers can dispatch energy resources (electric and gas) in real time to meet their needs through blockchain technology.

Blockchain technology is one such financial tool that has the potential to both improve and disrupt our energy systems. Blockchain has many potential applications. Think about electric vehicles. Blockchain networks could enable private owners of charging infrastructure to sell charging services, reducing charging costs, creating electricity storage options, and enabling greater adoptions of EVs.

Transactive energy doesn’t just work for electricity; there are potential applications for other fuels as well. Picture a similar system for natural gas, where distributed energy resources are producing RNG and the distribution company is managing the supply and demand.

The question of whether or not the consumer is being adequately protected, or even needs to be, with these new financial systems is up for debate.

Social Drivers

Shifting away from technology, there are also social drivers such as climate change mitigation influencing the energy transition which are primarily being led by governments.

While meeting government targets is critical to our future, having a singular focus on reducing greenhouse gas emissions inadvertently leads to a fixation on energy supply, and ignores our greenest opportunities.

As the International Energy Agency points out in its 2040 Outlook, energy efficiency can play a key role in reducing global energy demand by nearly one quarter with over ten percent reduction in greenhouse gas emissions by 2040.

One example that summarizes the energy revolution nicely is the recently announced partnership between Enwave Energy Corporation and Mattamy Homes who are designing a pilot neighbourhood of approximately 300 homes, serviced by a community-scale distributed geothermal energy system for heating, cooling, and domestic hot water.

The community’s heating and cooling system will be maintained, operated and delivered by Enwave. But many questions are still to be answered. Does a 300 home community with one company offering heating and cooling, warrant regulation? And if so, how on earth could regulation keep up if this model is replicated?

If it doesn’t warrant regulation, how do you protect the customer – should some form of insurance be provided? And if this one is beyond the scope of regulation, shouldn’t we also allow for unregulated microgrids? Or should electricity be treated differently?

Where Do We Go From Here

Whether you are an individual, business, municipality, government, utility or economic regulator you will be impacted by the energy transition. To ensure we don’t step into the pitfalls of unintended consequences, QUEST is conducting leading research on how to achieve a low emission future through innovation in energy policy and regulation. We are convening senior executives from multiple sectors to discuss the challenges and translate our collective efforts into actionable solutions, and we are working to help governments, utilities, developers, and regulators ensure they are making educated decisions.

If you would like to join the conversation consider joining one of our working groups or taking advantage of our advisory services.

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